This should be a big money maker until the competition forces prices down.
Even then the disk drive makers have the cost advantage. During the last upcycle, vertically-integrated SEG achieved peak gross margins of 27-28% and net margins of around 10% while the virtuals achieved peak gross margins of around 15-20% with net margins around 5-8%. The persistent overcapacity probably means lower gross margin profiles this time around but surely, any company that is looking at the prospects of competing against these disk drive companies has to be aware of the way they tend to compete in terms of price. For example, add disk drive-type of margins (10-15% gross margins, 5% net margins) to NTAP-type of margins (50+% gross margins, 10+% net margins) to appreciate the cost advantage of a disk drive maker.
What is interesting to watch is how the enterprise storage OEMs WILL continue to accomodate the disk drive makers' move into the low-end of the market. IBM, of course, is in a class all by itself because it makes its own disk drives and competes across the board from storage appliances to the high-end. Dell, Compaq, HWP and the other PC OEMS, on the other hand, basically have to be more savvy about whether to compete with their disk drive suppliers or use them to supply building blocks of their own storage solutions.
Storage is projected to account for 70-75% of the annual IT budget so that is where the growth will have to come for the PC OEMs. And like everybody else playing catch-up, they also have to deal with EMC's move into the middle market.
This is a snapshot of the enterprise storage market:
IBM-mainframe compatible market + UNIX + NT
EMC
IBM, Fujitsu, Hitachi, Storage Tech
UNIX + NT
SUNW, CPQ, HWP
DELL
NTAP, MTIC and other storage appliance suppliers
MXTR, SEG, WDC, DSS, Fujitsu, Samsung
The obvious target for the disk drive makers is clearly NTAP-type of revenue growth (high double digits) and margins (50+%). These junkyard dogs, er, disk drive makers start off with their own historical gross margin and net margin profiles as a cost advantage. The chronic inability to make money in the disk drive business can only heighten the possibilities of untimely component shortages.
One of the potential problems is that these disk drive companies will squander whatever money they make in the NAS/SAN market by plowing all the profits back to the disk drive business which still has to solve the problem of perennial overcapacity caused primarily IMO by the way the independent component makers effectively lower the barriers to entry to that business.
There are interesting times ahead for the industry especially now that everybody at SEG has to be fixating on the pots of gold involved in a deal where a select class of shareholders (insiders) will do very well, another class of shareholders (85,000+ SEG employees) will do okay and another class of shareholders (805 institutions, retail) will get a raw deal. |
